The tracks a country's economic transactions with the world. It's split into current, capital, and financial accounts, each measuring different aspects of international economic activity. Understanding these components is crucial for grasping a nation's economic health and global position.
The reflects trade and income flows, while capital and financial accounts show changes in asset ownership. These balances impact , , and overall . Surpluses and deficits in these accounts have far-reaching effects on currency values, debt levels, and global economic dynamics.
Balance of Payments Structure and Components
Balance of payments components
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Top images from around the web for Balance of payments components
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The Accounting Process | Boundless Business View original
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Balance of payments (BOP) records all economic transactions between a country's residents and the rest of the world over a specific period (usually a year)
Key components include current account tracks trade in goods and services, records capital transfers, and covers investment flows
Balancing item accounts for statistical discrepancies ensures accounting balance
system records each transaction as credit and debit maintaining overall balance
like foreign exchange reserves, gold reserves, and Special Drawing Rights (SDRs) used by central banks to manage currency fluctuations
Current vs capital vs financial accounts
Current account encompasses trade in goods and services, primary income from investments, and secondary income like remittances
Capital account covers capital transfers and transactions involving non-produced, non-financial assets (land rights, intellectual property)
Financial account tracks direct investment, , other investment, and financial derivatives
Key differences: current account involves ongoing economic activity, capital and financial accounts deal with asset ownership changes
Time horizon varies: current account focuses on short-term flows, capital and financial accounts can have longer-term implications
Impact on national wealth differs: current account directly affects GDP, capital and financial accounts influence asset composition
Current account and national savings
National accounting identity CA=S−I links current account balance (CA) to national savings (S) and investment (I)
determines current account balance: surplus when S > I, deficit when S < I
National savings influenced by private savings (household and corporate) and public savings (government budget balance)
Investment affected by interest rates, economic growth expectations, and business confidence
Current account balance reflects economy's net lending/borrowing position relative to the rest of the world
Economic impact of account balances
indicates net borrowing from abroad potentially leading to external debt accumulation and currency depreciation pressures
Deficit benefits include increased investment and access to foreign capital and technology but risks vulnerability to sudden capital flow stops
signifies net lending to other countries resulting in foreign asset accumulation and potential
Surplus implications include reduced domestic consumption or investment relative to production
Policy considerations involve , fiscal and monetary policies, and structural reforms to address imbalances
Long-term sustainability assessed through and
impact international trade and capital flows potentially contributing to financial crises (2008 Global Financial Crisis)